Property-casualty industry leaders are generally pessimistic about the year ahead, expecting a deepening soft market and deteriorating profitability, with even a mild recession making it that much harder for carriers to grow their top- or bottom lines.

Indeed, by more than a three-to-one margin, no improvement is expected in personal or commercial lines profitability, according to a survey of top company and association executives gathered here for their annual reunion--the Property-Casualty Insurance Joint Industry Forum.

In addition, 92 percent expect a higher combined ratio in 2008. Only 4 percent foresee any growth in premiums for the year--against 62 percent anticipating "flat" results and 34 percent predicting industrywide premium volume will actually decline.

"This year, the combined ratio will be markedly under pressure, with rate-cutting accelerating and feeding the flames," said Evan Greenberg, chairman, president and chief executive officer of Bermuda-based ACE Ltd., during a CEO panel at the forum.

"It's certainly going to be challenging to generate top-line growth in commercial lines," agreed Ramani Ayer, chairman and CEO of The Hartford.

Still, he predicted that "barring any serious catastrophes, 2008 will continue to be profitable from an underwriting standpoint. It will have to be, given falling interest rates" and a volatile stock market.

Mr. Ayer also does not expect the bottom to fall out of the market any time soon, citing "several circuit breakers" preventing carriers from desperately underpricing coverage just to maintain market share.

"For the public companies at least, there is far more disclosure, so shareholders' appreciation of your fundamental performance is much greater," he said. "We will still have a cyclical business, but whether we'll hit the depths we have in the past is less likely."

Gerald Schmidt, president and CEO of Mutual of Enumclaw in Washington State, also said he "would not underestimate the revolution in the boardroom," noting that enterprise risk management is in place at a growing number of carriers, while Sarbanes-Oxley disclosure requirements check the ability of public companies to go overboard on price-cutting.

"Peoples' feet will be held to the fire in ways they weren't in the past," said Mr. Schmidt.

However, despite greater pressure applied by analysts, auditors and regulators, Mr. Greenberg noted that "on the other side of the coin, you have a lot of capacity and capital. You don't know the true cost of your product until long after you've sold it, so there is still plenty of room to kid yourself."

With rate cuts accelerating, he added, "I have a hard time seeing this cycle as being much different."

While he said "balance sheets are in good shape right now," he noted "there is still too much surplus and capacity in this business." He said publicly-held carriers "can return the excess to shareholders, or you could act like a mutual and return it to policyholders through lousy underwriting and underpricing."

Mr. Ayer said he is aware "the economics of this industry are that if you retain excess capital, you'll eventually burn a hole in your balance sheet."

He cited another speed bump he thinks might keep price-cutting from getting out of control, noting that primary carriers cannot get cheap reinsurance to back them up in a bottomless soft market.

"Reinsurance as a group today tends to be more disciplined on price," he said. "As a buyer, I would say reinsurers, because they are still disciplined, will make money at the levels where we have bought coverage. They're not going nuts." Still, "that said," he noted, "prices are going down."

Thomas Wilson, president and CEO of Allstate Corp. in Northbrook, Ill., agreed that lack of reinsurance is a hurdle to unbridled top-line growth--at least for homeowners insurers. "There are still reinsurance capacity issues at the higher limits and in coastal areas," he said.

But Anthony Kuczinski, CEO of Munich Re America in Princeton, N.J., observed that "memories tend to be short in this business," and warned that "insurers should be playing in this market with caution."

Mr. Kuczinski characterized 2007 as a Jekyll & Hyde year for the reinsurance sector, "with significantly different conditions in the second half than in the first." He noted that for the just concluded Jan. 1, 2008 renewal season, "reinsurers were trying to hold onto their discipline, but prices deteriorated more than they should have."

He said with "pricing competition heating up on the part of ceding companies, we're getting closer to that tipping point" in terms of profitability.

The panelists also cited concerns about how a recession--even a mild one--might hurt the industry.

While none of the CEOs expect a deep or prolonged downturn in the economy, the credit crunch, the collapse of the housing market, a plummeting U.S. dollar and falling interest rates might undermine what little chance carriers have to grow their business this year, the panelists agreed.

Conceding that "the economic scenario is a little shaky," Mr. Ayer said that "if you do have a longer or deeper than expected recession, workers' comp fraud and claims frequency tend to rise as unemployment climbs," while exposure growth would slow or even contract as fewer businesses or construction projects are launched.

"It's likely going to be a mild downturn, with anemic growth, but these trends can feed on themselves globally," said Mr. Greenberg. "If Europe starts slowing down, too, so will Asia, and then you have a worldwide situation that will certainly impact our premium and on the claims side."

With interest rate cuts, he added that "inflation--even stagflation--are big risks."

The possibility of greater consolidation also was cited by the panelists, fueled both by a desire to expand through acquisition because organic growth is so hard to come by, and with the cheap dollar perhaps tempting foreign companies bargain-hunting for a greater share of the U.S. market.

But Mr. Schmidt of Enumclaw dismissed such talk, again citing the greater attention being paid by boards to operational and strategic decisions. "Insurer boards are a lot more savvy that most M&As don't work out as planned," he said. "A much better story must be told to the board to pass due-diligence muster."

As for any fear of a wave of foreign takeovers, Allstate's Mr. Wilson pointed out that "it may be cheaper to buy our companies," given the weak U.S. dollar, "but that means our earnings are also worth less, too, so our companies might not be such a bargain after all."

The political outlook is also problematic, with Washington preoccupied by the presidential and congressional elections, attendees indicated. Ninety percent of those surveyed here said Congress would not approve national catastrophe legislation, while 70 percent said optional federal charter legislation would not gain momentum this year.

Seventy-two percent predicted that a Democrat would win the White House on Election Day.

Special Reports /

CEOs Pessimistic About 2008, Expecting Prices, Profits To Deteriorate

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